| BJS WHOLESALE CLUB INC set forth in Item 1A Risk Factors, and other factors noted elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, particularly those noted under “Critical Accounting Policies and Estimates” |
| In addition, any forward-looking statements represent our estimates only as of the day this annual report was first filed with the Securities and Exchange Commission and should not be relied upon as representing our estimates as of any subsequent date |
| While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change |
| Business General BJ’s Wholesale Club introduced the warehouse club concept to New England in 1984 and has since expanded to become a leading warehouse club operator in the eastern United States |
| As of January 28, 2006, BJ’s operated 165 warehouse clubs, including two ProFoods Restaurant Supply clubs, in 16 states |
| The table below shows the number of Company locations by state |
| State _________________________________________________________________ Number of Locations _________________________________________________________________ New York 34 Florida 23 Massachusetts 18 New Jersey 18 Pennsylvania 13 Maryland 9 Connecticut 8 Georgia 8 North Carolina 7 Virginia 7 New Hampshire 6 Ohio 6 Rhode Island 3 Maine 2 Delaware 2 South Carolina 1 _________________________________________________________________ TOTAL 165 _________________________________________________________________ On July 28, 1997, BJ’s Wholesale Club, Inc, a Delaware corporation, became an independent, publicly owned entity when Waban Inc |
| (“Waban”), BJ’s parent company at the time, distributed to its stockholders on a pro rata basis all of the Company’s outstanding common stock |
| Other fiscal years are referred to in a similar manner |
| Industry Overview Warehouse clubs offer a narrow assortment of food and general merchandise items within a wide range of product categories |
| In order to achieve high sales volumes and rapid inventory turnover, merchandise selections are generally limited to items that are brand name leaders in their categories and a growing private brands assortment |
| Since warehouse clubs sell a diversified selection of product categories, they attract customers from a wide range of other wholesale and retail distribution channels, such as supermarkets, supercenters, department stores, drug stores, discount stores, office supply stores, consumer electronics stores and automotive stores |
| BJ’s believes that it is difficult for these higher cost channels of distribution to match the low prices offered by warehouse clubs |
| Warehouse clubs eliminate many of the merchandise handling costs associated with traditional multiple-step distribution channels by purchasing full truckloads of merchandise directly from manufacturers and by storing merchandise on the sales floor rather than in central warehouses |
| By operating no-frills, self-service warehouse 2 ______________________________________________________________________ facilities, warehouse clubs have fixturing and operating costs substantially below those of traditional retailers |
| Because of their higher sales volumes and rapid inventory turnover, warehouse clubs generate cash from the sale of a large portion of their inventory before they are required to pay merchandise vendors |
| As a result, a greater percentage of the inventory is financed through vendor payment terms than by working capital |
| Two broad groups of customers, individual households and small businesses, have been attracted to the savings made possible by the high sales volumes and operating efficiencies achieved by warehouse clubs |
| Customers at warehouse clubs are generally limited to members who pay an annual fee |
| Business Model We have developed an operating model that we believe differentiates us from our warehouse club competition |
| First, we place added focus on the individual consumer, our Inner Circle^® member, through merchandising strategies that emphasize a customer-friendly shopping experience |
| Second, by clustering our clubs, we achieve the benefit of name recognition and maximize the efficiencies of our management support, distribution and marketing activities |
| Finally, we seek to establish and maintain the first or second industry leading position in each major market where we operate |
| We create an exciting shopping experience for our members with a constantly changing mix of food and general merchandise items and carry a broader product assortment than our warehouse club competitors |
| By supplementing the warehouse format with aisle markers, express checkout lanes, self-checkout lanes and low-cost video-based sales aids, we make shopping more efficient for our members |
| For the convenience of our members, we maintain longer hours of operation than our warehouse club competitors |
| While all wholesale clubs sell merchandise in bulk, BJ’s also offers smaller package sizes that are easier to carry home and store, including sizes that are comparable to those offered in supermarkets |
| Smaller package sizes can be found in a number of our fresh food categories, including dairy, meat, bakery, fish and produce |
| We are also the only major warehouse club operator to accept manufacturers’ coupons, which provide added value for our members, and we accept more credit card payment options than our warehouse club competitors |
| Expansion Since the beginning of 2000, BJ’s has grown from 107 clubs to 165 clubs in operation at January 28, 2006 |
| Approximately 37prca of our clubs have been in operation for fewer than six years |
| We plan to open 12 to 15 new clubs in 2006, all of which are expected to be in existing markets |
| Year _________________________________________________________________ Clubs in Operation at Beginning of Year _________________________________________________________________ Clubs Opened During the Year _________________________________________________________________ Clubs Closed During the Year _________________________________________________________________ Clubs in Operation at End of Year _________________________________________________________________ 2000 107 11 — 118 2001 118 12 — 130 2002 130 13 3 140 2003 140 10 — 150 2004 150 7 — 157 2005 157 8 — 165 In addition to the club openings shown above, we relocated one club in each of 2000, 2001 and 2005 |
| In each case, we replaced an older club with a new prototype |
| Store Profile As of January 28, 2006, we operated 144 traditional size “big box” warehouse clubs that averaged approximately 112cmam000 square feet, 19 smaller format warehouse clubs that averaged approximately 71cmam000 square feet and two ProFoods clubs that averaged approximately 62cmam000 square feet |
| The smaller format clubs are designed to serve markets whose population is not sufficient to support a full-sized warehouse club |
| Including space for parking, a typical full-sized BJ’s club requires 13 to 14 acres of land |
| The smaller version typically requires approximately eight acres |
| Our clubs are located in both free-standing locations and shopping centers |
| 3 ______________________________________________________________________ Construction and site development costs for a full-sized owned BJ’s club generally range from dlra5 million to dlra8 million |
| Land acquisition costs for a club generally range from dlra5 million to dlra10 million but can be significantly higher in some locations |
| We also invest dlra3 to dlra4 million for fixtures and equipment and approximately dlra2 million for inventory (net of accounts payable) and incur approximately $ |
| 9 to dlra1dtta0 million for preopening costs in a new full-sized club |
| Merchandising We service our existing members and attract new members by providing a broad range of high quality, brand name merchandise at prices that are consistently lower than the prices of traditional retailers, including discount retailers, supermarkets, supercenters and specialty retail operations |
| We limit the items offered in each product line to fast selling styles, sizes and colors, carrying an average of approximately 7cmam500 active stockkeeping units (SKU’s) |
| By contrast, supermarkets normally stock from 30cmam000 to 52cmam000 SKU’s, and supercenters typically stock up to 125cmam000 SKU’s |
| We work closely with manufacturers to develop packaging and sizes which are best suited to selling through the warehouse club format in order to minimize handling costs and to provide increased value to members |
| Food accounted for approximately 59prca of BJ’s total food and general merchandise sales in 2005 |
| The remaining 41prca consisted of a wide variety of general merchandise items |
| Food categories at BJ’s include frozen foods, fresh meat and dairy products, beverages, dry grocery items, fresh produce and flowers, canned goods and household paper products |
| In response to growing demand from our members, we continue to increase the number of clubs that have rotisserie chicken and slicing delicatessen departments and premium prepared foods |
| General merchandise includes consumer electronics, prerecorded media, small appliances, tires, jewelry, health and beauty aids, household needs, computer software, books, greeting cards, apparel, furniture, toys and seasonal items |
| We believe that more than 70prca of our products are items that can also be found in supermarkets |
| BJ’s consumer-focused private brand products are primarily premium quality and generally are priced well below the top branded competing product |
| At the end of 2005, our private brand products had achieved a sales penetration of approximately 12prca of food and general merchandise sales on an annualized basis |
| We expect our private brand products to continue to represent an increasing percentage of sales over time |
| As of January 28, 2006, we had pharmacies in operation at 44 of our clubs |
| We plan to open pharmacies in two or three additional clubs in 2006 |
| We also offer a number of specialty services that are designed to enable members to complete more of their shopping at BJ’s and to encourage more frequent trips to the clubs |
| Specialty services include full-service optical centers; food courts, some of which offer brand name fast food service; full service Verizon Wireless centers; home improvement services; photo developing; BJ’s Vacations^®; garden and storage sheds; patios and sunrooms; a propane tank filling service; discounted home heating oil; and muffler and brake services operated in conjunction with Monro Muffler Brake, Inc |
| As of January 28, 2006, we had 87 gas stations in operation at our clubs |
| The gas stations are generally self- service, relying on “pay at the pump” technology that accepts MasterCard^®, VISA^®, Discover^®, American Express^® and debit card transactions |
| Cash is also accepted at some locations |
| Both regular and premium gasoline are available |
| We have generally maintained our gas prices below the average prices in each market |
| Our “BJ’s Premier Benefits™” program is designed to enhance the value of BJ’s membership to both consumer and business members |
| Included in the program are discounted rates for payment processing of all major credit cards; an automobile buying service; printing of business forms and checks; and installation of home security systems |
| 4 ______________________________________________________________________ Membership Paid membership is an essential part of the warehouse club concept |
| In addition to providing a source of revenue which permits us to offer low prices, membership reinforces customer loyalty |
| We have two types of members: Inner Circle members and business members |
| Most of our Inner Circle members are likely to be home owners whose incomes are above the average for the Company’s trading areas |
| We believe that a significant percentage of our business members also shops BJ’s for their personal needs |
| We had approximately 8dtta6 million BJ’s members (including supplemental cardholders) at January 28, 2006 |
| Effective January 1, 2006, we generally charge dlra45 per year for a primary Inner Circle membership that includes one free supplemental membership |
| Members in the same household may purchase additional supplemental memberships for dlra20 each |
| A business membership also costs dlra45 per year and includes one free supplemental membership |
| Additional supplemental business memberships cost dlra20 each |
| Geared to high frequency, high volume members, the program offers a 2prca rebate, capped at dlra500 per year, on generally all in-club purchases |
| Effective January 1, 2006, the annual fee for a BJ’s Rewards Membership is dlra80 |
| At the end of 2005, Rewards Members accounted for approximately 5prca of our primary members and approximately 10prca of our food and general merchandise sales during the year |
| Advertising and Public Relations We increase customer awareness of our clubs primarily through direct mail, public relations efforts, new club marketing programs, and, during the holiday season, television and radio advertising (some of which is vendor funded) and the BJ’s Journal, a publication sent to our members throughout the year |
| We also employ dedicated marketing personnel who solicit potential business members and who contact other selected organizations to increase the number of members |
| From time to time, we run free trial membership promotions to attract new members, with the objective of converting them to paid membership status, and also use one-day passes to introduce non-members to our clubs |
| These programs result in very low marketing expenses compared with typical retailers |
| Club Operations Our ability to achieve profitable operations depends upon high sales volumes and the efficient operation of our warehouse clubs |
| We buy most of our merchandise from manufacturers for shipment either to a BJ’s cross-dock facility or directly to our clubs |
| This eliminates many of the costs associated with traditional multiple-step distribution channels, including distributors’ commissions and the costs of storing merchandise in central distribution facilities |
| We route the majority of our purchases through cross-dock facilities which break down truckload quantity shipments from manufacturers and reallocate these goods for shipment to individual clubs, generally within 24 hours |
| Our efficient distribution systems result in reduced freight expenses and lower receiving costs |
| We work closely with manufacturers to minimize the amount of handling required once merchandise is received at a club |
| Most merchandise is pre-marked by the manufacturer so that it does not require ticketing at the club |
| Merchandise for sale is generally displayed on pallets containing large quantities of each item, thereby reducing labor required for handling, stocking and restocking |
| Back-up merchandise is generally stored in steel racks above the sales floor |
| We have been able to limit inventory shrinkage to levels well below those typical of other retailers by strictly controlling the exits of our clubs, by generally limiting customers to members and by using state-of-the-art electronic article surveillance technology |
| Our inventory shrinkage was no more than |
| 20prca of net sales in each of the last five fiscal years |
| Problems associated with payments by check have been insignificant, as members who issue dishonored checks are restricted to cash-only terms |
| Our policy is to accept returns of most merchandise within 30 days after purchase |
| 5 ______________________________________________________________________ BJ’s is the only warehouse club operator to accept each of MasterCard, VISA, Discover and American Express chainwide |
| Our members may also pay for their purchases by cash, check and debit cards |
| BJ’s has a co-branded MasterCard which is underwritten by a major financial institution on a non-recourse basis |
| Purchases made at BJ’s with the co-branded MasterCard earn a 1dtta5prca rebate |
| Rebates up to dlra500 per year per membership account are issued by the financial institution in the form of BJ’s Bucks^® certificates redeemable for merchandise at any BJ’s club |
| Information Technology Over the course of our development, we have made a significant investment in information systems |
| We were the first warehouse club operator to introduce scanning devices which work in conjunction with our electronic point of sale terminals |
| In recent years, we have enhanced the efficiency of our checkout process and implemented an on-line refund system at the clubs to more effectively process sales returns |
| We are the only operator in the warehouse club industry to offer self-checkout |
| As of January 28, 2006, we have expanded this technology to approximately 75prca of our BJ’s clubs |
| Sales data is generally analyzed daily for replenishment purposes |
| Detailed purchasing data permits the buying staff and store managers to track changes in members’ buying behavior |
| Detailed shrinkage information by SKU by club allows management to quickly identify inventory shrinkage problems and formulate effective action plans |
| Member Centric Business Model Over the last three years we have developed an infrastructure, which we call “Member Insight,” to better utilize our member data base |
| We are using Member Insight’s sophisticated analysis to segment our members according to their shopping behaviors in our clubs as well as in competing channels |
| This capability enables us to tailor BJ’s merchandise selection, adjacencies, pricing and marketing to the wants and needs of our most productive members |
| Competition We compete with a wide range of national, regional and local retailers and wholesalers selling food and/or general merchandise in our markets, including supermarkets, supercenters, general merchandise chains, specialty chains, gasoline stations and other warehouse clubs, some of which have significantly greater financial and marketing resources than BJ’s |
| Major competitors that operate warehouse clubs include Costco Wholesale Corporation and Sam’s Clubs (a division of Wal-Mart Stores, Inc |
| ), each of which operates on a nationwide basis |
| A large number of competitive membership warehouse clubs exists in our markets |
| Approximately 83prca of our 144 full-sized warehouse clubs have at least one competitive membership warehouse club in their trading areas at a distance of about ten miles or less |
| One of the smaller format clubs has direct competition from other warehouse clubs within ten miles |
| We believe price is the major competitive factor in the markets in which we compete |
| Other competitive factors include store location, merchandise selection, member services and name recognition |
| We believe our efficient, low-cost form of distribution gives us a significant competitive advantage over more traditional channels of wholesale and retail distribution |
| ProFoods In October 2004, we began testing a concept that is new to BJ’s by opening the first of two new clubs in the Metro New York market exclusively for food service businesses under the name “ProFoods Restaurant Supply” |
| Our second ProFoods club, which is also in Metro New York, was opened in January 2005 |
| The target members are professional food vendors and restaurant owners |
| The business model for ProFoods is built on somewhat 6 ______________________________________________________________________ higher merchandise margins than those generated by a wholesale club, free memberships and a broad merchandise assortment to support one-stop shopping, primarily on a cash and carry basis |
| We believe that we can leverage our success as a highly efficient operator of limited assortment formats that cater to defined customer groups |
| We have embarked on this test because we believe there is a substantial opportunity in this market, where the competition is fragmented and where we can apply our expertise with small businesses |
| Seasonality Our business, in common with the business of retailers generally, is subject to seasonal influences |
| Our sales and net income have typically been strongest in the fourth quarter holiday season and lowest in the first quarter of each fiscal year |
| Employees As of January 28, 2006, we had approximately 20cmam300 full-time and part-time employees (“team members”) |
| We consider our relations with our team members to be excellent |
| Available Information BJ’s makes available free of charge on its Internet website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (“SEC”) |
| Internet users can access this information on BJ’s website at http://www |
| You may read and copy any reports, statements or other information that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington DC 20549 |
| You can request copies of these documents, upon payment of a duplicating fee, by writing to the Securities and Exchange Commission |
| Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room |
| BJ’s intends to post on its website all disclosures that are required by law or NYSE listing standards concerning any amendments to, or waivers from, any provision of the BJ’s Statement on Commercial Bribery, Conflicts of Interest and Business Ethics |
| Certifications The Company’s Chief Executive Officer and Chief Financial Officer have provided the certification required by Rule 13a-14(a) under the Exchange Act, copies of which are filed as exhibits to this Form 10-K In addition, an annual Chief Executive Officer certification was submitted by the Company’s Chief Executive Officer to the New York Stock Exchange on June 7, 2005, in accordance with the New York Stock Exchange’s listing requirements |
| Item 1A Risk Factors The risk factors that appear below could materially affect our business, financial condition and results of operations |
| The risks and uncertainties described below are those that we have identified as material, but are not the only risks and uncertainties facing us |
| Our business is also subject to general risks and uncertainties that affect many other companies, such as overall economic and industry conditions, especially in the Eastern United States where most of our clubs are located, geopolitical events, changes in laws or accounting rules, terrorism, major health concerns or other disruptions of expected economic or business conditions |
| Additional risks and uncertainties not currently known to us or that we currently believe are not material also may impair our business, results of operations and financial condition |
| 7 ______________________________________________________________________ Competition May Adversely Affect Our Profitability We compete with a wide range of national, regional and local retailers and wholesalers selling food and/or general merchandise in our markets |
| Some of these competitors, including two major warehouse club competitors (Sam’s Clubs (a division of Wal-Mart Stores, Inc |
| ) and Costco Wholesale Corporation) who operate on a nationwide basis, have significantly greater financial and marketing resources than BJ’s |
| These retailers and wholesalers compete in a variety of ways, including price, location, services offered to customers and merchandise selection |
| We cannot assure you that we will be able to compete successfully with existing or future competitors |
| Our inability to respond effectively to competitive factors may have an adverse effect on our profitability as a result of lower sales and increased operating costs |
| New Store Openings are Critical to Our Growth Our long-term sales and income growth are dependent to a certain degree on our ability to open new clubs and gasoline stations in both existing markets and new markets |
| We cannot assure you that we will be able to achieve our planned expansion on a timely and profitable basis |
| Our expansion is dependent on finding suitable locations, which may be affected by local regulations, construction and development costs and competition from other retailers for particular sites |
| In addition, we may not be able to hire, train and retain a suitable work force to staff these locations or successfully integrate new clubs into our existing infrastructure |
| As a result, we may be unable to open new clubs at the rates expected or operate the clubs in a profitable manner |
| Our Comparable Club Sales and Quarterly Operating Results May Fluctuate Significantly Our comparable club sales may be adversely affected for many reasons, including new store openings by our competitors and the opening of our own new clubs that may cannibalize existing club sales |
| Comparable club sales may also be affected by cycling against strong sales in the prior year, by our own clubs entering into the comparable club base and by price reductions in response to competition |
| Our quarterly operating results may be adversely affected by losses in new clubs, price changes in response to competitors’ prices, increases in operating costs, extreme weather conditions, natural disasters, local economic conditions and the timing of new club openings and related start-up costs |
| Our quarterly operating results may also be affected by the volatility in gasoline and energy prices |
| As a result, our quarterly operating results are not necessarily indicative of the results to be expected for any other quarter |
| Our Business May be Affected by Issues that Affect Consumer Spending Our results of operations may be affected by changes in economic factors that impact consumer spending |
| Certain economic conditions such as changes in inflation, unemployment levels, tax rates, interest rates, energy and transportation costs, insurance and health care costs and labor costs could reduce consumer spending or cause consumers to shift their spending to our competitors |
| Reduced consumer spending may result in reduced demand for our items and may also require increased selling and promotional expenses |
| A reduction or shift in consumer spending could negatively impact our business, results of operations and financial condition |
| Certain Legal Proceedings Could Adversely Impact Our Results of Operations We are involved in a number of legal proceedings involving employment issues, personal injury, consumer matters, credit card fraud and other litigation |
| Certain of these lawsuits, if decided adversely to us or settled |